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Feb 27, 2016 #1
Cementing growth – Prospects for
Pakistan's cement industry
.................................
Cementing growth – Pr ospects for
Pakistan's cement industry
For Pakistan's cement industry's growth, much will depend on how the
economy performs and the government responds.
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Illustration by Creative
Unit.
The year 2015 was a busy one for Pakistan’s cement industry. Not onlydid local demand for cement increase by 12% in one year, but four
cement companies (Attock, Cherat, DG Cement and Lucky Cement)
announced their intention to increase production capacity. When these
plans reach fruition (probably in the next year or so), they will effectively
increase the overall production of cement by 7.7 million tons – from the
current 45 million tons to 53 million tons per annum.
The increase in demand and planned increase in production capacity
have many implications for the industry; however, to understand them
fully, it is essential to step back and examine the dynamics of this sector.
Despite having an extremely well developed cement industry, Pakistan’s
per capita cement consumption which stands at 140 kgs, is the lowest in
the world – the global average is 400 kgs per capita. Poor economic
growth, lack of government interest in infrastructure projects and high
real estate and housing prices have kept local cement demand fairly low
and for many years, cement manufacturers, especially those based in
the south region (Sindh and Balochistan), have focused mainly on
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exports. Manufacturers whose production facilities are in the north (KPK
and Punjab) have shied away from exports due to prohibitively high
costs of inland transportation.
However, in the last six years, the export market has shrunk, so that
whereas the industry exported about 10.98 million tons (26% of its total
production capacity) in 2008, the first five months of FY 2015-16 saw
this number drop to 2.56 million tons (a mere five percent of totalproduction capacity). This reduction in exports was due to two major
factors. One, prohibitively high sales tax and excise duties (both federal
and provincial) make the price of Pakistani cement uncompetitive in the
international market and two, the drying up of traditionally thriving export
markets such as the UAE and South Africa which have now built up
their own cement production capacities and no longer require cement
from Pakistan. In fact, South African manufacturers recently went to the
extent of persuading their government to impose anti-dumping duties on
Pakistani companies such as Attock, Bestway, DG, and Lucky in order
to protect their own interests.
The impact of lower exports has been especially significant on
companies such as Lucky Cement, which over the years has invested in
developing their own terminal at Karachi port as well as an in-house
export fleet. Amin Ganny, COO, Lucky Cement, puts a statistical value
on this saying that “whereas the company used to do 40% local sales
and 60% exports in 2008, today we export about 25% of our production
whereas rest of the cement we produce is sold locally.”
With the prices of coal (the fuel used in cement production) in decline from $140
per ton to $70 and now to $52 per ton, the cost of producing cement is lower and
this makes most cement manufacturers optimistic about the future, although
they are adamant that the government must reduce sales tax and excise duties
to make the product even more cost effective.
It is therefore just as well that although exports have dwindled, there has
been an upsurge in local demand. The announcement of the China-
Pakistan Economic Corridor (CPEC), a $46 billion mega project, which
will include infrastructure development projects across Pakistan and the
lowering of real estate prices – which has led to the initiation of severalnew housing projects - are the two major reasons for increased local
demand.
Mohammad Fazlullah Shariff, CE, Thatta Cement, says that about 60%
of the cement produced in Pakistan at present is used in infrastructure
projects, and the housing sector accounts for the remaining 40%.
However, Syed Muhammad Anwar, CEO, Dewan Cement, is of the
opinion that the reverse is true.
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“Real estate and builders are consuming 70% of cement while 30% is
used in infrastructure.”
Irfan Sheikh, Director Finance and CFO, Bestway Cement, tends to
agree with Anwar and says that the lion’s share of business is coming
from the housing sector. This makes sense considering that according to
news reports from May 2015 (Source: The News), Pakistan faces ahousing backlog of nine million units, particularly for poor and
disadvantaged people and the government has announced several
plans to address this shortfall.
This combination of increased demand from housing and infrastructure
has in a way forced cement manufacturers to shift their focus to the local
market. Some, like Lucky Cement, initiated mass media advertising
campaigns in 2012 to build up their brand image – not only with
contractors and builders who are generally the decision makers when it
comes to choosing a brand of cement, but also with customers buildingtheir own homes. Others, like Bestway (which is also advertising now),
have introduced new products, such as bonding agents and tile grout in
addition to their existing cement product lines to establish a USP of sorts
for themselves.
Establishing a USP is not something that cement manufacturers have
paid much attention to in the past, and many still think of cement as a
commodity rather than a product with marketing potential, and Sheikh
strongly believes that because cement has been selling by itself,
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companies have simply not bothered with marketing.
However, considering that cement prices are not fixed (they vary
according to quality and consumer perception), local demand is going to
dominate in the future and there will be increased competition due to an
increase in production capacity, there is now certainly room for
companies to market themselves, regardless of whether they choose to
go for a B2B approach or target end consumers directly.
One way of targeting end consumers directly could be through bringing
about a change in the SKUs. At present, the cement industry offers
loose cement for major builders and contractors, but the only SKU
available to small time consumers of cement (i.e. those using it to build
personal homes or for DIY projects) is the 50 kg bag. Although smaller
sized SKUs such as 25 kg and 10 kg are available in international
markets, local cement manufacturers have not ventured in that direction
so far. A reason why, says Sheikh is the cost of the packaging which is
made from imported kraft paper and costs about Rs 20 per bag for 50kg of cement.
“If you reduce the packaging size to say 25 kg, it would not automatically
reduce your packaging cost by 50%; it may only reduce it by two to three
rupees, and therefore on a per kg basis, it may become more expensive
to package smaller quantities.”
Another reason why companies have not worked on new SKUs is due
to the fact that it would require a large capital investment to acquirepacking machines for new sizes. However, as the Pakistani market
develops, this may become a viable and necessary investment.
Marketing, whether in the form of varying SKUs or by investing in
advertising, might also become essential in the future, because despite
increased demand and the significant potential for growth, the industry
still faces major challenges. Firstly, the import of cement from China and
Iran through official and unofficial channels poses challenges for local
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producers and although the government has imposed a 20% import duty
on Iranian cement, there is still a great deal of supply. Secondly,
Pakistani cement manufacturers still have a surplus capacity of nine
million tons (mainly due to the fact the exports are down) that still needs
to be absorbed in the local market
........
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